Investors Shift Focus to Dividend Stocks in Anticipation of Federal Reserve’s Interest Rate Decision

In the lead up to the Federal Reserve’s impending interest rate decision in September, investors are showing an increasing interest in dividend stocks. Paul Baiocchi, the chief ETF strategist at SS&C ALPS Advisors, believes that this movement towards dividend stocks is a wise strategy, especially with the Fed expected to ease rates. Baiocchi notes that investors are transitioning from money markets and fixed income towards dividend stocks, particularly those of leveraged companies. These leveraged companies are expected to benefit from a potentially declining interest rate environment.

ALPS, the issuer of various dividend exchange-traded funds (ETFs), has seen increased traction with their offerings, such as the ALPS O’Shares U.S. Quality Dividend ETF (OUSA) and the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM). Baiocchi highlights that both the OUSA and OUSM ETFs have a higher weighting in sectors like health care, financials, and industrials compared to the S&P 500. This strategic allocation excludes sectors like energy, real estate, and materials, which are deemed volatile by Baiocchi.

Baiocchi emphasizes the importance of minimizing drawdowns when investing in dividend stocks. He states that OUSA and OUSM aim to provide drawdown avoidance by focusing on dividends that are not only durable but also have a track record of growth and strong fundamental support. By avoiding sectors with high price and fundamental volatility, these ETFs strive to offer stability and consistent returns to investors.

Mike Akins, the founding partner of ETF Action, views dividend stocks like OUSA and OUSM as defensive strategies due to the clean balance sheets of the underlying companies. Akins acknowledges the rising popularity of dividend-focused ETFs but admits that the exact reason for this trend remains unclear. Despite the uncertainty, the appeal of dividend stocks as a defensive play in anticipation of market fluctuations seems to be resonating with investors.

The growing interest in dividend stocks ahead of the Federal Reserve’s interest rate decision reflects a cautious yet strategic approach by investors looking to navigate potential market volatility. As ETFs like OUSA and OUSM gain traction for their focus on quality dividends and defensive positioning, it signals a shift towards stability and long-term growth in investment decisions.